18 October 2008

Off to Ohio

I'm taking a few weeks off to volunteer with the Obama campaign. I expect little or no time for blogging, but I do want to celebrate the dedication of people like Jesse, my friend and campaign organizer in Toledo, Ohio, who has got me over there. (See here for a report on a campaign rally in Toledo - Obama even thanked Jesse personally! What cool people I know).

If you have a few days or even just a weekend, the campaign needs people to knock on doors and make calls - the more face-to-face contact the better. This has got to be one of the biggest mass social movements in history.

10 October 2008

Deaton on the randomistas

Last night, Angus Deaton gave the British Academy’s annual Keynes lecture on ‘Instruments of Development?’. I expected it to be enlightening; it turned out to be witty as well.

Some questions recur in economic research again and again, without ever seeming to get closer to a resolution. “Does aid work?” is one. “Do children learn better in small classes?” is another. Frustrated by years of trying to identify ever smaller effects in ever more complicated regressions, we have resorted to two clever techniques: instrumental variables (in macro) and randomized controlled trials (in micro). Angus Deaton suggested that these apparently different techniques are closely linked and similarly flawed.

Economics, like any social science, has a problem with experiments. You can’t work out the effect of aid on development by randomly selecting one country to receive aid and another not to: even if it were moral, it wouldn’t be practical because there’s so much else going on. Instrumental variables are a clever technique to overcome this (see ‘Freakonomics’): basically, you have to find a factor that could contribute to the effect you care about (latitude helps determine prosperity) without any possibility of reverse causation (because the prosperity of a country has no effect on its latitude). Deaton argued, in short, that instrumental variables are no panacea, because they are not statistically exogenous and in any case countries differ in ways we cannot control. If economists set instrumental variables up as a gold standard, we doom ourselves to eternal methodological debates amongst ourselves and ridicule from everyone else.

Randomized controlled trials are even more popular in the micro development world. Want to know by how much a vaccination programme improves public health? Easy: just pick the counties you vaccinate at random and compare the outcomes. Leaving aside the ethical difficulties with this (who deserves to come first?), the technique only tells us the mean treatment effect; it doesn’t tell us whether the effect was distributed widely or limited to a few very special cases. Moreover, some of the randomizations are less random than they seem. Supposed you picked schoolchildren with surnames starting with A to take part in an experiment: would they really do better because of the experiment, or because they have always sat in the front row and got more attention from their teachers? Maybe, maybe not: we don’t know.

Deaton poked fun at the ‘randomistas’ (Banerjee, Duflo, Kremer and others) but was sympathetic to their quest for identification, as long as it has a theoretical foundation. He also argued we should avoid randomization to test very obvious propositions (“Do parachutes help keep people who fall out of planes alive?”) or those that pose grave ethical problems (“do HIV-positive people receiving anti-retroviral drugs live longer than those who don’t?”). Rather as with evidence-based medicine, the statistical evidence is only as good as its interpretation by the doctor, or the economist, who applies it to the patient’s condition. Randomized controlled trials, in this view, should take their place in the economist’s toolkit, as one useful tool among many rather than as the knockout argument.

I agreed with all of his points as far as economists are concerned. My worry is what the non-economists (and that’s most of us) are supposed to do. Are we really supposed to wade through umpteen regression models and meta-analysis papers? Are we supposed to get excited about some tiny coefficient that is significant at the 95% level? I fear that policymakers and donors, who might understand the finding of a random evaluation, will turn off as soon as regressions rear their head. Surely it’s better for decision-makers to have some scientific evidence than none at all. Let the economists work out the 95% answer; meanwhile the rest of us will make do with 80%.

07 October 2008

Nicholas Stern on a global deal on climate change

The publication of the Stern review two years ago helped shift the climate change debate from science to economics. Climate change sceptics can no longer argue that global warming is a myth or within natural variation: instead, their argument is that it is too expensive to do anything about it right now. Not exactly "wait and see", more "wait until it's cheaper".

Nicholas (now Lord) Stern addressed some of these issues yesterday in a public lecture at the London School of Economics. His timely message was that the current financial crisis is small compared to the havoc that serious climate change will wreak. What havoc? Many things, but the main effects are "all about water". A 5 degree warming (quite possible by 2100 under a 'business as usual scenario') is in the same order of magnitude as the difference between the middle of the last Ice Age and now. The combined effects of rising sea levels and retreating glaciers could force half the world's population to move. Apparently, India is already building a border fence around Bangladesh.

The main focus of the speech was on what a 'global deal' looks like and how we might get there. Stern suggested six components:

1. To stabilise carbon dioxide concentrations at a reasonably 'safe' level of 500ppm, a 50% reduction in greenhouse gas emissions (compared to 1990 levels) by 2050. This probably means an 80% reduction in developed countries and more in the USA.

2. By 2050, 8 billion of the world's 9 billion people will live in developing countries. So developing countries must lead the deal, because it will be their world. We cannot force them to cut emissions: they should be forcing us to show them how.

3. Markets and carbon trading will be essential to get reductions at the lowest possible cuts. There will be some exceptions at first to bring people on board (steel? aviation?) but we should aim to phase them out.

4. Whatever targets we set for emissions reduction, we need to stop deforestation quickly. There are lots of ancillary benefits to this (flood control, biodiversity) but it will have to be combined with development. "Climate change and development are deeply linked - if we fail on one, we fail on the other".

5. Technology: nothing should be ruled out, including carbon capture and storage (CCS) and nuclear power. This was controversial with the audience at LSE, but Stern held his ground: we need to try everything, fast, to figure out what works.

6. Adaptation: poor countries will be hit first and hardest. We urgently need to work out how to get low-carbon development in an increasingly hostile natural environment.

The rest of the speech concerned how to put together this global deal and the research programme needed to support it (this is a university, after all). "Surely the global financial crisis shows us what happens if we become aware of a serious risk and don't deal with it".

Some of Lord Stern's targets are being adopted by politicians. Barack Obama has spoken of an 80% reduction in greenhouse gas emissions by 2050; Gordon Brown has committed the UK to doing the same (though he's trying to wriggle out by excluding aviation - see here). What about the developing world? "Attitudes in China and India have changed a lot in the last 2 years, though there is still justified anger at the hypocrisy of the 'rich countries'."

It seems it always requires a disaster (Katrina? Lehman Brothers?) to shake politicians into action. Sadly, at the current rate we are going to need a few more disasters before the key players, China or the USA, take serious action on climate change.